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Trading The Macro-Market Disconnect

Tyler Durden's picture




 

As we recently noted, the US Macro picture is considerably less sanguine than every talking head would have you believe. Not only are earnings for Q4 coming in notably weak, but the top-down macro picture is its worst in almost five months - and turned negative this week. Of course, the fact that our 'market' is dislocated from any sense of reality will come as no surprise to anyone; but, the chart below provides some, perhaps useful, insight into how to trade this disconnect (and its inevitable convergence). To add a little more impetus to this decision, the past two weeks have seen the US macro picture drop at its fastest rate since June 2011 - right before the last debt-ceiling debate, which was followed by a quite notable decline in stocks.

While not perfect, the combination of the 20/100 DMA with the fact that US ECO has turned negative is a strong indication of a short-term correction in stocks

 

What could generate a correction now? We see the following near term concerns:

1. A complacent ECB. Whereas the Fed and BoJ are adding to asset purchases, and the BoE may do so soon judging by the King Speech Tuesday night, the ECB will likely (continue to) contract its balance sheet as LTROs are repaid and does not seem in the mood to cut rates either. This might present most problems via the currency. But if the ECB makes the same mistakes by tightening policy as under Trichet in mid 2011, European stocks could really suffer. Since our economists expect instead further cuts eventually, and OMT activation could generate balance sheet expansion, our base case is underperformance, not Armageddon, in European equities. But it is worth noting that a theme in meetings in 7 European financial capitals over the past couple of weeks has been: why shouldn’t European equities do better this year? This suggests that investors are already positioned for gains/ outperformance.

2. Another concern is Japan. Well before Elections in Japan on 16 December last year, aggressive investors built short JPY (and long NKY) positions anticipating pressure for easier monetary policy from Japan. While the Election outcome and subsequent BoJ decisions (more QE, higher CPI inflation target) have to a large degree validated these expectations, we think this move might have run its course for now. In part this reflects the slightly disappointing BoJ decision to postpone further balance sheet expansion to 2014. And in part recent official comments that JPY rapid depreciation may have downside risks. There may be pressure from trading partners if Japanese government spokesmen return to too explicit a policy of talking the JPY lower. The JPY/ NKY move may have another leg when the BoJ Governorship changes on 8 April but we have cut our tactical position to zero for now. If the market confuses JPY short term strength/ NKY weakness for a general risk off move, this could also cause near term volatility more generally.

3. Another investor focus is the recent softness of the data, particularly in the growth outperformers. In very recent days, better than expected European data have kept our G10 ESI from falling further though zero. But the US index remains soft and so does the EM overall index. On the US ESI, after 4.5 months in positive territory, the index has moved negative, partly because of the way it is designed to mean revert over time. Positive surprises last year decay out of the index over 3 months and at an accelerating rate. This may lead to some participants citing ESIs as a concern for risk assets. Our own Risk-On/ Risk-Off (RORO) rule for markets based on ESIs was triggered on 17 January - as seen above.

Of course, there is all the other usual stuff too such as the debt ceiling deadlines, politics in Europe and elsewhere, deleveraging etc. However, the three concerns listed are where we would see a more serious setback coming if it did.

 

Source: Citi

 

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Sun, 01/27/2013 - 19:09 | 3189638 Muppet Pimp
Muppet Pimp's picture

Nothing Mr. Potter cannot handle from the NY fed desk.  Forward Comrades!

Sun, 01/27/2013 - 19:19 | 3189658 hairball48
hairball48's picture

It would look ominous...if I knew what it all meant :)

Sun, 01/27/2013 - 19:24 | 3189677 clara-to-market
clara-to-market's picture

I see the DOW climbing to 30,000.

And why the fuck not?

The global markets are rigged.

Soon, we'll all be dining on dog food.

http://www.angrysinner.blogspot.kr/2013/01/sunday_27.html

Sun, 01/27/2013 - 19:40 | 3189715 legorf
legorf's picture

As the economic picture gets more bearish, the Fed will increasingly intervene to levitate the markets.

That's probably bullish ... until its not anymore?

Sun, 01/27/2013 - 20:04 | 3189753 holdbuysell
holdbuysell's picture

In the spirit of macro economic decline, this trailer was released last year, but I didn't see until (indirectly) directed there by Krieger's LibertyBlitzkrieg from one of his posts. Looks to be intense if they ever make it.

Gray State

http://www.graystatemovie.com/pages/white.html

Trailer here:

http://www.youtube.com/watch?v=Gy7FVXERKFE

Sun, 01/27/2013 - 21:50 | 3190036 orangegeek
orangegeek's picture

Cool charts.  There's some divergence occuring with the moving averages tops and the SP500 - another bearish indicator.

 

Check out the SP500 hourly - it just keeps incrementing up.  Traditionally, markets go from volatility to non-volatility to volatility - not sure what this would represent.

 

http://bullandbearmash.com/chart/sp500-hourly-continues-incremental-moves/

Mon, 01/28/2013 - 00:10 | 3190396 Glass Seagull
Glass Seagull's picture

 

In totally unrelated news:

FRBNY is working closely with Citi and BofA in order to develop an investable version of the USECO index...so that the Fed can buy the ever-living shit out of it and send it higher.

Do NOT follow this link or you will be banned from the site!